Here's a one page summary of leading stories from this weekend's (October 28) Barron's (paid sub. req.), noting stocks to watch for Monday morning when the market opens and brief comments on the Barron's articles. Clicking on a stock ticker pulls up opinion, analysis and a quote; clicking on a headline takes you to the full Barron's article. Receive this summary by email every week by signing up here.
BARRON'S COVER: Technology Outlook By Bill Alpert
Highlighted companies: Dell (DELL), ASML (ASML), Cymer (CYMI), KLA-Tencor (KLAC), McAfee (MFE), Symantec (SYMC), Synopsys (SNPS), Avici Systems (AVCI), Crown Castle Intl. (CCI), NetEase.com (NTES), New York Times (NYT), The Knot (KNOT), WebMD (WBMD)
Summary: The tech sector has outperformed over the past few months, as earnings guidance had been massively cut with an eye on a slower economy but tech spending (both corporate and consumer) has actually continued apace. The sector's valuation remains around its historical average, and there are no signs of a slowdown in corporate IT buying. Data storage and application software look particularly strong. Barron's annual tech outlook includes opinion from analysts at Paul Wick's Seligman Communications and Information Fund, which is up 16% this year. Bullish calls: Wick thinks McAfee may be a buyout target in the wake of its options difficulties. He's also long cap equipment producers KLA-Tencor, ASML and Cymer, and a software supplier to that industry - Synopsis. Seligman analysts are bearish on semi majors such as AMD and the fund is short Avici Systems, an 'also-ran' in the telecom router business that they claim have simply run out of orders. Other Seligman short ideas: NetEase (slowdown in online gaming), WebMD (overvalued), The Knot (overvalued), the New York Times (too much exposure to newspaper advertising) and cellular antenna-tower provider Crown Castle International (overleveraged).
Quick comment: Smallcap AVCI may well move on Monday morning in response to this article. WebMD is trading at 340 times earnings. Read The New York Times Company's recent conference call for insight on its print vs. online businesses.
China Funds' Shell Game By Leslie Norton
Highlighted companies: China Automotive (CAAS), China BAK Battery (CBAK), Comtech Group (COGO), Intac International (INTN), Origin Agri-Tech (SEED), Tiens Biotech (TBV), Wonder Auto (WATG), Zeolite Exploration (ZXPL), and Zhongpin (ZHNP).
Summary: PowerShares argues that its Golden Dragon ETF (PGJ) is a safe way for investors to gain exposure to China because its holds 54 stocks listed on US exchanges (which have strict reporting requirements), in contrast to the iShares FTSE/Xinhua 25 Index ETF (FXI) which holds the 25 largest Chinese stocks listed on the Hong Kong exchange (which has less strict reporting requirements). However, the PowerShares Golden Dragon ETF tracks an index managed by Tim Halter, who runs an advisory company called Halter Financial that specializes in reverse mergers. Chinese companies he has taken public via reverse merger, in return for stock, include Nasdaq-traded China Automotive, Tiens Biotech, and bulletin board-traded China BAK Battery, Zeolite Exploration, Zhongpin, and Wonder Auto. Other reverse-merger stocks in the index include Intac International, Comtech Group, and Origin Agri-Tech. Reverse-merger stocks are subject to manipulation, and the Halter index in particular suffers from conflicts of interest as Tim Halter's firm has sold stocks after inclusion in the index boosted their prices. Members of Mr. Halter's firm claim that that criteria for inclusion in the index are objective and that rules exist to prevent conflicts of interest. The PowerShares Golden Dragon ETF is up 20% this year, considerably trailing the 37% rise of the iShares FTSE/Xinhua 25 Index ETF.
Quick comment: The Barron's article doesn't give much credence to Halter's defense -- that the index constituents are determined by preset criteria, so there's no room for manipulation. Perhaps the assumption is that Halter's firm is able to engineer reverse mergers to satisfy those criteria, so potential for, and actual, manipulation still exist. Nonetheless, while the governance issues seem to be of serious concern, the performance disparity of the iShares ETF over the PowerShares ETF may be due to factors other than the inferior performance of reverse-merger stocks, such as the difference in average market cap of the two ETFs and the performance of Hong Kong-listed versus US-listed Chinese stocks.
Canadian Sunrise By Andrew Bary
Highlighted companies: Canadian National Resources (CNQ), Suncor (SU)
Summary: Murray Edwards has overseen tremendous growth at Canadian National Resources, which holds both conventional oil and gas production assets and a big stake in an emerging Alberta oil sands project. Royal Dutch Shell's recent offer to buy out minority shareholders of Shell Canada for $7 billion (20x earnings) put a hefty valuation on Alberta oil sands and was therefore met with enthusiasm by CNR investors. CNR could be a takeover target from a larger player like BP or ENI that lack oil sands exposure. At a P/E of 18x 2006 earnings, CNR doesn't appear cheap, but as its below-market hedges on oil and gas prices roll off, 2007 should bring strong EPS growth. Labor-intensive oil sands development has become far more expensive, but CNR has made smart moves to keep overhead down. Barron's bottom line: 'The shares could hit the 60s in a year and go much higher in the long run.'
Related: Fairholme Capital's Bruce Berkowitz laid out his bull case on CNQ in May • Insight on the Canadian Oil Sands Trust from Kurt Wulff of McDep Associates
Long-Distance Winner By Jacqueline Doherty
Highlighted companies: Tellabs (TLAB)
Summary: Tellabs stock fell sharply following earnings last week when the telecom infrastructure company gave disappointing revenue guidance for Q4. But with products in two high-growth areas and a very reasonable valuation, bulls have a strong case to make. Tellabs trades at 17x next year's earnings - cheap by comparison to the 25x earnings Cisco recently paid for Scientific Atlanta. The revenue outlook pegged y-o-y growth of only 1-5%, but last year's figures were inflated due to BellSouth's post-Hurricane Katrina purchases. Tellabs' 5500 connects traffic between carriers and different types of networks (land, cable, wireless) and is threatened by the move to IP networks, but for the time being it's a cash cow with 40+% margins. Current question marks: (1) International growth and (2) Verizon's move to next-generation, GPON equipment for FTTH with competitor Alcatel as lead supplier. Barron's nonetheless concludes that 'the next three years look bright. The shares could climb more than 40% over that span.'
Related: Andrew Schmitt concurs with the Tellabs CEO that Verizon's move to GPON isn't happening as fast as analysts predict • Tellabs Q3 2006 Earnings Call Transcript
TECHNOLOGY TRADER: Sleeper Value in Dell Shares By Tiernan Ray
Highlighted companies: Dell (DELL)
Summary: Dell's loss of market share and credibility with corporate buyers have made it the tech stock dog of the year. It's for precisely this reason that some highly respected institutional value investors have been buying up shares. Southeastern Asset Management recently added 39.2 million shares to its position and now owns 5% of the company. Warren Koontz, manager of the market-beating Loomis Sayles Value Fund, hasn't bought shares yet but acknowledges 'I don't think their problems will get much worse from here on out' -- he's eyeing it 'with interest'. One potential catalyst: Microsoft's January Vista launch could jolt sales of corporate desktops. A good entry point into Dell stock may be after the October 31 tax-loss selling point as fund managers write off their Dell losses to offset gains.
Related: Dell F2Q 2007 Earnings Conference Call Transcript • Dell: Too Cheap to Pass Up? • Dell Admirers Make Their Case • Dell's Date With Destiny: Shape Up or Shut Down • Has the Tide Turned Permanently Against Dell?
An Awkward Marriage By Jay Palmer
Highlighted companies: DaimlerChrysler (DCX)
Summary: Five years after the merger with Mercedes producer Daimler, 'Chrysler is a mess' -- last week it reported a $1.47 billion operating loss for the third quarter, and statements from executives at parent DaimlerChrysler suggest that Chrysler may be on the block. Among the problems: ongoing market share loss to Asian imports, higher fuel costs undermining sales of its popular larger vehicles, and the UAW's refusal to grant it the same wage and healthcare concession that GM and Ford received. DCX stock was one of the industry's top performers in 2004-5, but has traded flat in 2006 in the $50-55 range while nearly every other carmaker has seen significant stock gains. CEO Dieter Zetsche was tasked with turning around Chrysler but now may act to protect the more valuable and profitable Mercedes unit, which is ramping operating profits amidst a 10% improvement in productivity and increased sales of higher margin vehicles. Barron's bottom line: 'DaimlerChrysler shares are likely to be dead money right now. And they're likely to stay that way until definitive signs emerge of a Chrysler comeback or a corporate divorce.'
Related: DaimlerChrysler Q3 2006 Earnings Call Transcript • DaimlerChrysler's New Marketing Strategy: The Beginning of the End for Car Dealerships? • Why Japanese Cars Earn $2400 More Profit Each • Chris Ceraso's Auto Industry Forecast and Stock Picks
What to Watch in Telecom By Sandra Ward
Highlighted companies: Echostar (DISH), DirecTV (DTV), News Corp. (NWS), Liberty Media (LINTA), AT&T (T)
Summary: Interview with Blair Levin, Managing Director of Stifel Nicolaus and veteran telecom and media expert. Levin sees a Democratic Congress pushing for network neutrality, and the big carriers hampered in their ability to fight back by pending mergers like that of AT&T/Bell South. He believes the most important issue facing telecom/media investors in the near future is that of direct-broadcast satellite [DBS]: how many multichannel video and broadband providers will we have? Can Echostar and/or DirecTV fill out a 'quadruple play' bundle of video/voice/data/wireless to compete with the cable companies and Bells? Levin's 'best guess is that a telco buys a DBS player and the most likely deal will be AT&T buying EchoStar.' Regarding edge-of-the-network companies driving product innovation: 'There has never been a company that has threatened as many business models as Google: newspapers, magazine publishers, television broadcasters, radio broadcasters, cable companies, telephone companies -- and none of them is Google's natural competitor.'
Related: Coverage of the net neutrality debate • DIRECTV Q2 2006 Earnings Conference Call Transcript • EchoStar CEO "More Hemmed In Than Ever" • EchoStar's Stock, at 6x 2007 Cash Flow, Could Double
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